Investments for Washington’s Future: Closing Selected Tax Breaks and Increasing the Small Business B&O Credit

INCREMENTAL STEPS TOWARD TAX REFORM:DISCUSSION BRIEF #3

The problem: Over the past decade, state policy makers have given out an ever‐growing number of business tax breaks in the name of economic development, while our education system falls behind and commuters and goods sit mired in traffic. At the end of 2007, Washington had 567 tax breaks on the books. The legislature adopted fourteen new ones in 2008. Some exemptions, such as those on food and prescription drugs, improve the tax system by making it less regressive. But the cumulative results of too many tax breaks are a smaller tax base and not enough revenue for high-quality public services.

Washington also suffers from a regressive and outmoded tax structure. State taxes fall too heavily on low- and middle-income residents. Washington’s business and occupation (B&O) tax can also be particularly hard on new and small businesses, because it is charged on gross revenue whether or not the business makes a profit. And yet, public revenues grow more slowly than the need for public investments.

These underlying problems are compounded by the slumping national economy. Like most states, Washington is facing a budget shortfall. Without new revenue, Washington will be forced to cut essential services and postpone important new investments.

A step in the right direction: The economic downturn provides state policymakers the opportunity to embrace a more rational economic development strategy. High-quality public services, especially in education, transportation, and health care, provide the foundations for a flourishing economy with widely shared benefits. We can expand investments in priority services and strengthen economic growth by:

  1. Suspending selected business tax breaks to broaden the tax base and provide new funds ($400 million in reclaimed revenue).
  2. Increasing the small business B&O credit from $35 to $100 per month, to encourage small business creation and growth($130.5 million revenue loss).

Net new revenue in 2009‐2011: $269.5million 

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